Would you believe that when he started the group, Neal had zero multifamily experience?

Neal’s background is in technology education. He spent 15 years running a traditional company—and paying massive taxes—when his boss turned him on to the tax benefits of multifamily. Neal invested in a handful of single family homes, triplexes and fourplexes to learn the game, and he was ready to take the next step when he learned about a 12-plex deal that he couldn’t afford on his own.

By then, Neal had established his multifamily meetup, where he was candid about the fact that he didn’t have experience. Rather, he shared what he DID know—his research and knowledge of the numbers. And on the night that Neal shared the story of the 12-plex deal, he discovered that he had a knack for raising money as well.

Today, Neal and his partner have 1,000 units, with plans to hit 1,700 by the end of the year. Neal joins me to discuss how he was able to position himself as a leader despite a lack of track record and why his ability to tell the story of a project led to success with raising money. He talks numbers, sharing the importance of understanding the economics of an area before you invest and his take on the top two markets for 2018. Listen in for Neal’s insight around stock market corrections, partnering with experts and diversifying your real estate portfolio.

KEY TAKEAWAYS

Neal’s transition from single- to multifamily

Multifamily scales much better, always the goal Bought single family, tri-/quadplexes to learn Found 12-plex deal, told story in meetup Discovered knack for raising money Why Neal established a multifamily meetup without a track record

Encouraged meetup members to form groups (e.g.: underwriting) Learned from each other through open share Experienced future partner joined group Neal’s advice around avoiding the mistakes he made early on

Don’t assume taxes will stay the same Gain understanding of tenant quality How demographics can impact returns

Delinquency levels of African American tenants Marginal difference on western seaboard Three to four times higher in Midwest Vegas as transitional area, high turnover Work numbers into underwriting Neal’s top market picks with growth and value potential

TRANSCRIPTION

Announcer: This is the Apartment Building Investing Podcast with Michael Blank, Episode #96. Let’s do this!

You’re listening to the Apartment Building Investing Podcast, where we’ll talk about all aspects of buying apartment buildings with a special focus on raising money from others.

And now, your host, Michael Blank.

Michael: Hey, there, and welcome to the show. My name is Michael Blank. I’m really excited that you’re here to learn with me about apartment building investing.

Today with me I have Neal Bawa and he’s an accomplished multifamily investor. He’s a CEO of Financial Attunement and owns over a thousand units right now. He speaks at events all over the country. He’s got a Meetup with over 3,000 members in there, and he loves numbers.

So, I have him on the show to talk about three keys to getting started and that’s how he got started, some of the mistakes they made doing a thousand units, he’s going to share that with us. He’s going to answer the question: Is it now the right time to get into multifamily? And what is the outlook for the remainder of the year and moving forwards and he shares with us his best markets to invest in right now.

Before we get going, this show is now sponsored by my Financial Freedom Summit. It’s a two-day workshop, April 27-29, and it’s your chance to experience what it’s like to do a deal from start to finish in the space of two days. You’re going to work in small groups together, you’re going to analyze the deal, you’re going to negotiate the deal, you’re going to do due diligence. You’re going to have to deal with some twists and turns, you’re going to have to get financing, you have to raise money for it. Hopefully at the end, you’ll close.

It’s a fantastic way to experience what it’s like to do your first deal because as you know, doing your first deal is the key to triggering the law of the first deal, which puts you on the path of quitting your job in the next two or three years. That’s coming up April 27-29th. That’s in Northern Virginia. You can find out more at TheMichaelBlank.com/Summit. That’s the Financial Freedom Summit April 27th. It would be great to have you there.

Without any further ado, let’s get right into the interview with Neal. Hey, Neal, welcome to the show today!

Neal: Thanks for having me, Michael. I’m very excited to be here.

Michael: Introduce yourself just a little bit.

Neal: Sure. I am not real estate royalty, so I haven’t been doing real estate for 10 or 20 years or wasn’t selling homes in my diapers. I’m a technologist, so I had a full career there and after 15 years of running a company—a traditional company, not a dot com, sold that company.

It was a technology education business, and basically, that money went into real estate, but while I was running the company, we were growing it from 10 employees to 350 employees over that 15-year timeframe, it was cash flowing and I was paying massive taxes. Some years I was paying as much as 50% of my income in taxes and so I went to my boss and asked him about saving on taxes and he pointed me to multifamily real estate. Initially, like everybody else, I started in single family. Bought a house, bought 10, then bought duplexes and triplexes, bought another 10, ran out of loans, and that’s where my multifamily journey started. And at this point, we’re up to slightly over a thousand units and with what we have in contract and in construction, we’ll be at 1,700 units by the end of 2018.

So, long journey but very fruitful.

Michael: Yeah, it’s funny, a lot of us get to the same place in different routes, right? You obviously had some income. You were paying too much taxes. You’re like, “What do I do?” “Oh, the answer is real estate.”

A lot of people then start looking at single family houses. You went kind of right into multifamily. Why did you start looking right at multifamily and maybe skip the single family house turnkey investing or whatever the case may be?

Neal: Just because my boss, the CEO, who is the majority partner in the company, had already moved onto multifamily, so I got a chance to see what he was doing, and I realized that multifamily scales a lot better. As a chief operations officer, I had 300 employees, and all were reporting up to me and so scale was very important.

But then once I looked at multifamily, I realized that I needed more real estate experience, so actually, I did go back and do the whole single family thing. You know, 10 homes in California, 10 homes in Chicago. Most of the Chicago ones were duplexes and triplexes before I started really getting into the larger multifamily. But the goal was always to go with multifamily. From the very beginning, I knew that the scale, the infrastructure, the professionalism that comes with multifamily is very hard to replicate with single family.

Michael: Interesting. So, you did get started with single-family house and then eventually you said, okay, now it’s time to go into multifamily. How did you kind of break into that? What kind of education did you get? How did you fund these? Did you raise money? Did you use some of your own money or a combination?

Just talk about how you made that transition from single family into multifamily?

Neal: Sure. This was a period where—I think it was about 2012—I was buying a lot of triplexes and quadplexes in Chicago. At the same time, I had my own Meetup Group, I was continuously presenting about multifamily. I was presenting about the best states, the best cities, all those kinds of things and so I was building great connections.

This building came up and it was a 12-plex and it was 4 triplexes. It was a fantastic project, I loved it, but I didn’t have the money to buy all four of them. I had the money to buy one of them. I realized that for this first project, I’m going to find other people’s money. I went back to my group and told people the story of this project in a seminar that I did in Fremont, California and a lot of people responded, a lot more than I thought. It was a 45-minute event with Power Points and pictures of this project. Back then, my aim wasn’t really to raise money. I just wanted some partners so that I could grab a hold of that one out of four units and they could have the other three.

But by the time I completed the process, I realized that I had a knack for this. That when I would go out and present, people wanted to buy, so that went very quickly. Within a week, I had three other investors that basically bought their own properties and I charged people a fee, and it was nothing like syndication. I remember charging, I think $10,000 per person, so it was a flat fee.

So, I charged that, and I felt good about it and then I started to help them with the lease up and various other activities that they were not very good at. All three were new to real estate. As I went through that process of helping them with this, I realized that I had gained a lot of knowledge managing my own 20 properties and I wanted to put that to work.

I went back to my boss and I said, “I know we’re going to sell the company in two years. I know you’re going to retire and buy a mega-mansion. I want to do real estate. I want to do commercial real estate and I’m going to bring a Meetup Group into my business,” because we were a college, so we had these huge classrooms. It was perfect, projectors, classrooms, internet access. I mean, you couldn’t find a better place to do a Meetup.

I basically said, “I’m going to create my own Meetup, it’s going to be a multifamily Meetup, not a regular real estate Meetup, and I’m going to bring it in here and my goal is to have 250 members.” That was, I think, early 2012, and it just snowballed from there, Michael. Because today it’s the largest multifamily group in the U.S. We have 3,600 members. Last night I presented real estate trends to a room that had 91 people in it. That’s our typical number of people that show up for a monthly meeting and so things have really just snowballed out of the passion for teaching and sharing some of these things that I’m learning and sharing some of my mistakes with others. That is a big hot button for me.

Michael: There’s a couple things that are interesting. First of all, you said you created a Meetup, right? And then you started teaching on multifamily, even though you didn’t really have any kind of track record at all. But setting up a Meetup and doing these things started setting you up as some kind of expert.

Now, this is kind of weird. People go, “I can’t do that because I don’t have a track record.” You didn’t have a track record at the time, you did it anyway. Why did you do it and why did you think that people would listen to what you had to say?

Neal: Sure. Because I was just telling them the honest truth. I was teaching in the college. I told them my office is 150 feet that way. I’m a technologist and this is a technology college, so I’m just like you. I’m somebody that is sharing what I know. My learning and my knowledge is highly incomplete. I don’t have a track record and so if you invest with me, you do so knowing that I do not have a track record and that I’m new and that I’m going to make mistakes.

Michael: I like that.

Neal: That resonated with people. It felt like I was more real, for some reason.

Michael: Well, that’s exactly right and this is why I encourage everybody. Everybody listening to this going, “Oh my gosh, I don’t have any track record,” but a little bit, you got to behave like you are and start sharing the information you do know because you’re sitting there watching YouTube videos, listening to podcasts, reading research reports and that you know a little bit more than the next guy, so why don’t you just start sharing that?

That’s what you did and pretty soon, you start being perceived as an expert and you start drawing people to yourself, which is what you did.

Also, another thing I found interesting, picked up on, is you didn’t have enough money to buy these four duplexes and initially you didn’t want to raise money, but you said you want to tell the story. I think there’s a nuance in what you just said because yes, everybody wants to raise money, but really what we’re doing is we’re telling a story.

Even today, when we do webinars, it’s all about the story that you tell about investment. Sometimes you come across an investment and there’s not a good story. It’s like kind of blah, like not very exciting and the returns are kind of average and no one can really get excited about it.

I think what you said is, when you’re raising money, it’s not so much about raising money, it’s number one, establishing relationships with people and telling the story like you said, just sharing your enthusiasm.

Is there anything else that you think stood out for you when you started raising money? That experience that you had when you started having some early success? What are some of the ways that you did that, that kind of gave you that early success?

Neal: Well, one of the things that I did that really worked out was I started to encourage people that were coming to my Meetup to form groups. We formed an underwriting group. We formed a group that had more time, so they were willing to travel and go out. We started taking pictures and videos of what we were doing out there and sharing it with the rest of the group. It was a very, kind of open-sharing process and that resonated again with the group and helped me build the competency because there were other people in the group that were basically providing some of their knowledge and experience to me.

Then finally I got lucky. Someone with a great deal of experience in multifamily walked in and he taught at my Meetup. We became co-Meetup owners, so now he and I run that Meetup together and so he, being in real estate since 1982, he had a track record, he’d done a syndication, a successful syndication, but he didn’t know how to scale. He didn’t know how to find investors, he’s not an operational expert. He’s not the kind of type of person that will go into a project management software 15 times a day and update tasks. So, he’s a big picture guy.

The moment I met him I realized I had met a future partner. It was so instantaneous that it’s like, okay, if I, two years from now when I sell my business, if I retire and I go into commercial real estate, who am I going to partner with and the answer was: It has to be John Mark [phonetic]. When I met him, I knew that already and then I had time to build and cultivate that relationship over years while still doing my day job.

Michael: You were able to get going earlier because of this partnership with John Mark?

Neal: Yep, absolutely. It definitely helped. I think that being candid with my group gave me that initial start, but then having someone like John Mark that had a track record behind me, made a huge difference.

Michael: Now we’re bringing up partnering, right? Again, everyone listens to this, how do you get started? It’s learning to raise money, it’s telling the story. It’s presenting yourself as an expert, but it’s also partnering. Think about ways that you can partner and Neal, that’s exactly what you did, and you brought value to that relationship.

Were you able to get started? He added instant credibility to you, number one, but you also provided some scale to him as well, so the partnership kind of worked out great. I like that a lot.

Now, you guys got going with multifamily and what kind of mistakes did you make? What lessons did you guys learn early on and probably even to this day? What are some of the things that people can try to avoid?

Neal: Well, my first project was a trial by fire. We basically started with the worst project, which is common in these sorts of relationships. Our first project together was a project in Chicago and it was very challenging. We made a number of mistakes.

The first thing was we assumed that the taxes that the guy was paying were actually the taxes that everyone was supposed to pay. It turned out that in Chicago, there was a designation called Class 9 and if your building was not doing well and was below 80% occupancy, you could basically seek a higher level of taxes. It was a discount on the taxation and it was a massive discount. It was more than a $100,000 a year in tax discounts.

We basically took his numbers and stuck that into our underwriting to disastrous results. Firstly, we learned that you shouldn’t assume that simply because someone’s numbers are there, and you can see them paying those taxes that that’s what’s going to happen for you. We learned that we needed to—when we went into a new city, we needed to talk to a lot of people and pay people, consultants, partners, people who had boots on the ground. Someone should have basically said to us, “Hey, I’m looking at this Performa and I think these taxes are half of what they should be. In fact, I think they’re less than half of what they should be.” We didn’t have that person and it almost destroyed our project with one mistake.

Michael: That’s amazing. Anything else you guys learned?

Neal: One of the key things that I learned from that project was you really need to have an understanding of tenant quality. We see a lot of projects, so if you’re looking at a project in Memphis and you’re comparing that to a project in Salt Lake City and you see that everything looks the same. The numbers look the same, the cap rates look the same, the purchase price is the same. Well, one of the things that is very likely to be different between those two markets is the quality of tenant. Because I can tell you that the quality of tenants in Memphis is nowhere near the quality of tenants in Salt Lake City. Salt Lake City has Mormons, Mormons tend not to default because of religious reasons. The Church actually will pitch in if they’re short on money, so your default rate in Salt Lake City might be between half a percent and 1-1/2%, where your default rate in Memphis could be 7-9%. If you factor that default rate in, that Memphis buy is not going to be a good one, but the Salt Lake City one will be an outstanding buy.

I think that we learn very early to focus and have an understanding of the true tenant quality of a city and a neighborhood when we started making offers because that makes an enormous to your turnover, to your rehab, your ongoing maintenance costs. The quality of tenants is so critical.

Michael: Yeah, absolutely right. Now, I know you love demographics, Neal, so I want to talk about that and I want to talk about your outlook for 2008 because you love numbers and I love that you love numbers, because you’re a technology guy like me a little bit, so I want to really get into that.

But why do you say that demographics kind of—you hinted at it right now, an example of how demographics make a difference, but there’s more that goes into it. Talk about why you think demographics are important?

Neal: I think they’re all important. I think that in a market like ours, which is mature. We’re seven years into this cycle, if you don’t understand demographics, you can cut your returns not just to half, you can get to the point where you don’t have any returns at all.

So, I’m going to use an extended description of demographics, right? What I’m talking about are not just demographics, but really a macro understanding of the economics of an area.

A lot of people think Dallas is a great metro and I think that it may quite possibly be, over a 10-year timeframe, the best metro in the United States for multifamily investment for a wide variety of reasons. But that is a macro understanding.

The truth today is, that Dallas has had a very large amount of supply come in. Right? New supply come in. Dallas also has a very large number of people like Neal that are running around trying to make offers. More people like me because there’s two gurus that are based in Dallas that have hundreds, if not thousands of students.

Because of those gurus and their students, well, the prices have really gone up. When you understand these, and you really study that, the right market today is not Dallas, it’s Fort Worth. Fort Worth is 20 miles away. So, we sold our Dallas property to high returns for investors, and we bought a property in Fort Worth because as Dallas becomes more and more expensive and the rents keep going up and the cap rates keep going down, people are looking at the next area.

Not quite demographics, that’s market analysis, demographics plays a big role into it because what you need to do is to understand the ethnicity of your tenants. Ethnicity makes a big difference, and this is especially true of those that are investing in the Midwest. This is not a racist comment, it’s very strictly a demographic comment. If you’re renting to African-Americans on the Western seaboard of the United States, your delinquency levels are going to be marginally different from that of, let’s say white or Hispanics. But if you’re renting to African-American folks in the Midwest of the United States, your delinquency will be three to four times higher.

Now, as a landlord, this is something that you need to understand. That doesn’t mean that you don’t rent to African-Americans, because a lot of these places, they are your market. They are the people that live there. But understanding it, putting it into your numbers is absolutely critical.

So, to understand demographic trends is very important.

Another piece is really understanding the demographics from a job perspective. So, Vegas. You look at Vegas and Phoenix. In Vegas, if you have the same exact property at the same exact price and same exact cap rate, your turnover is going to be a lot higher than Phoenix because Vegas is a transitional area.

If your demographics for that property are young people that are in the 20 to 40-year group, keep in mind that they’re going to turnover every 14 months, 13 to 14 months. But in Phoenix, they’re going to turnover every 22 to 23 months. The difference between those two numbers is not a million, it’s millions of dollars over a five-year investment timeframe.

I could give you a dozen other examples and they’d all be like this: Demographics and an understanding of your audience makes a massive difference to your returns.

Michael: Is it correct then—and I agree that the understanding has to be correct, but it’s not necessarily that one is better than the other, even though in absolute terms they might be. But I think what’s important here is that the message is not, don’t invest in the Midwest.

Neal: You got it.

Michael: Make sure that you understand and work it into your underwriting. Because what happens is, you make an assumption, you work it into your underwriting and it was a wrong assumption.

Neal: Correct.

Michael: Now, if you know that the turnover is going to be X-percent, you know delinquency rate is going to be 9%, and you work it into your underwriting and the deal works, well, you got yourself a great deal, assuming you want to get into that kind of asset class.

But what I’m saying is, that there’s oftentimes a disconnect, it seems, between your understanding of an asset and the demographics and the assumptions with it, or would say look, just avoid those kind of things? Where do you kind of fall on that spectrum?

Neal: Yeah, I’m really glad you asked that question. Don’t avoid the Midwest. My message is not that the Midwest is good or bad. My message is you really have to understand the demographics of your audience. The audience is very different. You need to underwrite for it.

But one of my most popular examples in my own scenarios is Columbus, Ohio. That’s a Midwest market. I really love Columbus, Ohio. I think it’s a great market. But then I contrast it with two other markets that I don’t think are as good as Columbus. Again, those may be very profitable markets.

I look at Columbus, Ohio up here. Then I look at Cincinnati, Ohio, and then I look at Cleveland, Ohio, and then below that I look at Dayton, Ohio. These are all markets in the same state with a fairly similar demographic of people and fairly similar income levels, but the quality of the markets from Dayton all the way up to Columbus is massive. And that’s what people need to understand.

But they’re all in the Midwest and it’s possible that you’ll make more money in Dayton, at the bottom, than you would make in Columbus at the top, if you understand what you’re doing, and you account for it in the numbers.

Michael: That’s right, you account for it in the numbers. That doesn’t mean that you should do nothing in Dayton and everything in Columbus, that’s not what it meant. You have to understand your assumptions and that’s a very good point.

Now, there are some markets we both kind of look for, job drivers, economic growth. We want to get into markets that are growing. Yes, there’s going to be different tenant bases, but really, we want to get into a market because it has an intersection of growth and value, right?

Neal: Yeah.

Michael: Dallas, being an example where high growth, but you can’t get the value anymore, you can’t get the intersection. We’re really trying to look for markets that have an intersection of those two.

What are some of the markets that you like that you think would be good for the next few months that provide that combination?

Neal: Last night, that was the topic that I talked to these 90 people. What I did was I took three buckets. There is the cash flow bucket or the projected high cash flow markets. There are the hot markets. Hot markets are not necessarily high cash flow or high price appreciation. They are markets in which if you put a property up for sale, it’s going to have multiple offers and it’s going to have it very, very quickly. Those are fix and flip markets and they tend to be the biggest markets in the U.S. Then there’s the markets that have price appreciation.

What I was trying to do is using eight different providers, Zillow, Trulia, Realtor.com, Yardi Matrix and a variety of other providers. I was basically trying to find the intersection between those. Exactly what you just said. What you’re trying to figure out is: This is a value market, so it’s going to have some price increases, but this is also a market that has sufficient rent growth, so I can make money today and not have to wait for that value two or three years from now.

When I looked at the intersection of those, I had a table with 80 cities laid out with 8 different providers, here’s what I found: If you’re looking at Western markets, so a good portion of the people listening to this podcast live on the Western seaboard of the United States and they’re comfortable investing there, the number one market on that side unquestionable, it’s not even close to number two, is Sacramento. That’s a market where today, you get a decent cap rate compared to everything else on the Western seaboard

But what’s important is projected rent increases for the next three years are not just the highest on the Western seaboard, they are the highest in the U.S. You’re looking at potentially 20-24% increases in rent in the next three years alone and if I could take that even in a market like the Bay Area, I would take it. Even in the San Francisco Bay Area, because 24% is a massive increase in rent over three years.

Michael: Yes.

Neal: But the fact that in Sacramento I can actually get some cash flow on the day that I walk in, is terrific.

Now, a market that’s identical or almost identical to Sacramento, just one level below, is Orlando. In Orlando, we’re seeing job growth higher than Sacramento, so in Sacramento, right around 2-1/2% job growth. Orlando is at 3-1/2% job growth. The market is actually tighter in terms of inventory in Orlando than it is in Sacramento.

What’s interesting is, Orlando, it’s not just a city by itself that’s doing well. There’s this golden area that starts in a city called Deltona. It is 15 miles northeast of Orlando and there’s a freeway that runs from Deltona and it hits Orlando in 15 miles, then it starts to travel east. 40 miles later, it hits the City of Lakeland and then 40 miles later, it hits Tampa.

I can tell you that this freeway, from Deltona to Tampa, is absolute gold at this point in time because the cities on that lane show up in six, seven different provider’s data in terms of both rent increases and price increases. Sacramento, Orlando are two huge picks for multifamily, guys. Anything over four units, you couldn’t go wrong with those two markets.

Michael: That’s great. You just got to make sure the cash flow is from day one, right? That’s how we get ourselves into trouble.

Neal: That’s right.

Michael: Well, not us, but others got in trouble before the recession, is hey, let’s buy for no cash flow and hope the price goes up. By the way, I’ll slap a five-year ARM on it, so I have to refinance in five years. Let’s not do that again! [Laughs]

Neal: Absolutely. Absolutely.

Michael: Yeah. That’s very cool.

Let me talk about the—thank you for the markets, that’s fantastic. Talk about returns for investors. Let’s talk a little bit, a lot of people are obviously syndicating or raising money. But there’s also a lot of passive investors out there who are looking for yield or are exploring investing in multifamily.

I think one of the challenges has been over the last three or four years is actually finding deals that make sense. Because it’s been very challenging because after the recession, 2010, ’11 and ’12, the returns were really very attractive for investors because the market tightened up so quickly, so fast, and it was almost impossible to lose money in that time.

My perception is that investors have gotten very used to really high returns. What is your perspective on the kind of returns that investors or seeing or should expect? In other words, should investors continue to expect the returns they’ve had over the last four years? Should be lower or give some counsel to the investors who are evaluating multifamily deals.

Neal: Okay. I think multifamily is an excellent asset class, but I think that your expectations as an investor—and I’m speaking to you as an investor directly at this point—have to adjust and they have to adjust significantly.

Let’s say that two years ago you were looking at deals where people were making, you know, 23% cash on cash returns. How is it possible for those people to be projecting, let’s say 21 and 22 today? When in that timeframe, interest rates have gone up, right? You have higher interest rates at this point than you did, let’s say two years ago. And at the same time, cap rates have gone down. Properties now cost as much as 15-20% more.

There’s also a third factor. In ’14, ’15, and ’16, rent growth in the United States was not above par, it was significantly above par. It made me, it made Michael, it made a bunch of people look like superstars because the whole country had 4-1/2, 5% rent growth and some metros had 6, 7, and 8. Well, that’s slowing down now. We see a slow-down in rent growth, so is this not a good time to buy? It is because it’s still above trend.

The long-term trend in the United States is 2% growth and for 2018, we’re forecasting 3, 3-1/4% for the U.S. and for good markets like Orlando or Sacramento, double those rates, so there’s still good growth. But you cannot compare it to what was happening in the last three or four years.

My advice, my strong counsel to you is, if you are talking with syndicators and they’re showing you returns very similar to two to three years ago, those returns are not real. Those returns cannot possibly be real. The numbers don’t work. We have now started to adjust our investors’ expectations down. If our projects were doing 8 in terms of cash flow, we’re saying no, now they’re going to be more like 7. If our projects were doing that cash flow from day one, we’re now saying, no, it’s going to take us a year of rehabbing to get those returns.

Then overall, the IRR returns, the cash on cash, we’re bringing them down into the high teens from where they were in the low twenties. And I think that if you’re not hearing that from your syndicator, it’s a red flag. It’s a massive red flag because either they’re going into markets that are extremely risky, so they’re taking a very high level of risk, or they’re going into areas within good markets that are extremely risky.

Michael: Or there’s another possibility, Neal. There’s another possibility, which is that their underwriting is not conservative and that’s kind of what we’re seeing, are these great returns, yeah, but the reserves aren’t above the line. They’re using cap rates that are equal to or less than what they are today.

I see the same thing and we’re having similar conversations with our investors as well, it’s just kind of reset their expectations a little bit. When they say, “Oh, so and so is offering these kinds of returns,” I’m like, “Really? Are you sure about that?” Then I start asking questions. Where are you going? What kind of project is it? Is it a high risk project? What is their underwriting like?

Thank you for that. I think it’s something that we need to all kind of adjust to a little bit. That doesn’t mean though that we should make compromises in our investment criteria. It doesn’t mean that we should start going and spending more for stuff. We should have to stick to underwriting criteria.

One of the things I get a lot, also, Neal, is this the right time to get into it? This comes from everybody, both from passive investors and syndicators, “It’s so hard to find a deal and I’m not sure, it seems like we’re overdue for a correction, maybe I should wait.” What is your response to that?

Neal: The short answer is, I think this is a very good time to buy in general and I want to prove that from a data perspective, right? There’s a website called We, W-E, Are, A-R-E, Apartments, with an S, dot org. WeAreApartments.org. This is a nonprofit website. They don’t have an axe to grind. This is a group of people that are on the National Multifamily Housing Council and they are warning legislators, they are warning politicians, that we are building a massive shortage of housing in this country.

At this point, we are 4.7 million apartments short. What’s interesting is some of the cities that I just named, Sacramento, Orlando, Phoenix, these cities, the shortage is especially severe.

Go to this website. What I love about the website, it’s so graphical in nature, right? I want somebody to just put graphs in front of me, not to put Excel spreadsheets—I have Attention Deficit—and right there on the page, select Orlando. Select Phoenix. Select Sacramento. You’re going to be shocked by the supply and demand gap that we are creating, especially on the affordable housing side.

Now, I don’t think there’s much of a demand and supply gap in Class A, but on the B and the C side, the gap is widening. It widens until the year 2030 because of our aging population and because of the fact that some people simply cannot afford to buy ever higher prices for single families.

I want you guys to go in and take a look at that and tell me if you’re not seeing a once-in-a-lifetime or at least a once-in-a-decade opportunity. That opportunity is completely separate from the fact that yes, we’re seeing some low cap rates. Yes, we’re seeing interest rates going up. So, in the short term, I am cautiously bullish on the apartment market.

In the long term, the 5-year, 7-year, 10 term, I am very strongly bullish on the market because I think the fundamentals of the market, the demographics, are overwhelmingly in support of multifamily over single family or other asset classes.

Michael: We had a little bit of a market scare here recently, right? Dow Jones dropped by a million points, and so there’s a concern about a correction. Now, let’s say this happens a year from now, two years from now, whatever else. Why is it still a good idea, Neal, to buy multifamily now, even if something were to happen like that?

Neal: Because corrections are good. There’s this basic fundamental thought process that corrections are bad. Guys, corrections are awesome, and the Federal Reserve delaying corrections is not good for you. I’m looking forward to a correction, Michael is looking forward to a correction. We are all looking forward to corrections. Buy multifamily properties with people that have that mindset because they will be already buying properties where they’re assuming a correction is coming.

During that correction, I can tell you, I pretty much guarantee it, the cash flow that I was supposed to give you, that Michael was supposed to give you, will drop, right? But that’s okay because if it’s good properties, we’ll get through the process and once we get through the process, the strong fundamentals will take hold again

I do not believe that 2008 is imminent. That was a once—that was an odd thing that had nothing to do with real estate and everything to do with credit and the misuse of credit. Lending standards are a lot better today, so I think the next recession is a vanilla recession. By that, I mean something that’s 6-9 months long, 3/4 of GDP decline, followed by a recovery.

At the other end of it, the fundamentals still take hold. So, if you’re buying a property today, in 2018, you’re going to sell that property in 2023, after that recession. And when the market returns, I still think that we get really good cap rates and we will because of that recession, drop our interest rates again. Whoever is coming in to buy it from us in 2023 will give us the low cap rates that we believe the property is worth. That’s why I’m bullish.

Yes, corrections will happen. Assume it and plan for it and don’t worry about it too much.

Michael: What’s your comment about how multifamily performed in the last recession? Obviously it was a pretty deep one. Obviously real estate took a beating. Surprisingly, multifamily did not. What can you say about that because there is always people, like they’re still kind of scared. They see this correction and you position it very well. First of all, it’s not going to be as deep. The fundamentals are strong, but what if it happens? Oh my gosh, what if 2008 happens again?

How did multifamily actually perform during the last recession?

Neal: Well, it actually performed better than a lot of asset classes. Firstly, people had cash flow, so that was something that you don’t get with stocks. When the stock market goes down by 40 or 50%, we saw an even bigger correction 2008, you don’t have money, right? So, your pool of money is shrinking. When you’re invested in a multifamily, keep in mind that we’re all targeting multifamily that are 8% cash flow and that doesn’t include the cash flow that goes to me and Michael, right?

So, who gets hit first, the way that our operating agreements are written? First, Michael gets hit. Neal gets hit. Our portion of the cash flow shrinks first and then your portion shrinks.

Let’s say you go down to 4 or 5% and this is kind of worst case, 2008 sort of scenario, 4% in cash flow. You still have a property that is cash flowing. You still have a property whose value in aggregate is increasing. Maybe not a good time to sell, in fact, it would be a terrible time to sell. But you don’t have to sell and you’re still at plus-4%.

Now, assuming that that crashed like 2008, your stocks are minus-50. Do you want to be plus-4 or minus-50? In my mind, I want to be plus-4. That’s what we saw in 2008. We saw a lot of people that sat through that 2008, ’09, ’10 timeframe and then in ’10, they did something very smart. Interest rates fell all the way to 0, they refinanced. Their cashflow actually increased in ’10 and then they didn’t sell, if they were smart. They just sat on their new cash flow, started making 7%, then 8%, and slowly raising rents in ’11 and ’12, before selling in ’13, ’14, ’15.

Really, what happens is in terms of a deep crash in real estate, not only do we end up with a lot of opportunity to pick up cheaper properties, and if you’re with us, you’re part of that opportunity, but for the existing product, as interest rates go down, we have the ability to refinance and get some more cash flow, and we have the ability to sit through that recession.

I think recession equals opportunity for the right kinds of people.

Michael: That’s right. Both you and I, we’re funding this with long-term debt. In other words, we don’t want to be forced to have to sell or refinance this in five years. Who knows what the heck is going to happen? That’s really important and a lot of people, like I said earlier, got themselves in trouble because they didn’t buy for cash flow, there was none, and they had to refinance or sell in the worst time.

I love the way multifamily performed in the last recession. I think the default rate was .4% and that includes California and Florida, and it was because of these ARMs and because of the non-cash flow. Everybody else just rode right through it and it was just amazing. You look at different asset classes and there’s no asset class that performed any better, frankly. I mean, residential got hit, office building got destroyed, retail, oh my gosh. So, multifamily kind of just weathered the storm and I really like that because you’re getting—I mean, investors are getting above-average returns, they’re getting an extremely favorable risk profile and the task advantages are insane. No one even talks about that in real estate. That’s what you got into because you were paying too many taxes, right? So, love that.

Yeah, I appreciate that perspective on it.

What are you excited about right now, Neal? What do you got going on?

Neal: We’re so busy, we’ve had to diversify because as you said today, the big challenge is not finding equity, it is finding deals. Finding deals that make sense.

I’m doing a number of things. Number one, I’m reaching out to people like you. Michael, you know, obviously this conversation happened because of my desire to work with high-quality folks that are not just living in the moment, they’re really thinking about what they’re doing. I’m expanding my network because I think that that’s a very critical thing to do. At this point, it’s a mature cycle, for us to get together and look at bigger opportunities that we could take on.

We’re also expanding the scope beyond multifamily. We’re going student housing for the last two years. We have two projects and very, very pleased with them. And now we’ve diversified to our first senior housing project. We think senior housing is a terrific asset class. It is the least sexy of all of the asset classes and that’s what makes it really interesting to me.

Senior housing is also very operations intensive because a senior housing is a multifamily with a hotel and a hospital. You think about that, you’re doing all of these, you have a full kitchen, you’re planning every single meal, you’re doing four meals a day for every single resident, so you’ve got that hotel concept, right? Where they’ve got these huge areas where they’re sitting down and getting service and they’re also getting room service.

But at the same time, it has to be a hospital because the average age of your tenant is over 75.

The operational concepts are very difficult. If you look at a multifamily, you and I know the math. If you have 250 units, you’ll have 5 full-time staff that work at the property. You know that for senior housing, that’s 60. That’s 60 people that work in a 250-unit senior housing, so it’s taken me some time to wrap my head around that. I’ve been traveling. I’ve been visiting senior housing facilities and now we’re ready to do it and so we’re actually partnering with someone like you, that’s a senior housing expert, and they have 24 facilities in 10 states, 1,550 employees, that are all in senior housing.

We’re reaching out and expanding our network, so we can get into areas such as senior housing.

I’ve also spent three months really getting into the industrial side because I think industrial is an asset class that will in fact even outperform multifamily for the next 10 years because of this explosion of eCommerce. I’m looking to find people that are experts in that area and partner with them and learn from them.

So, it’s a very busy time but it’s a very exciting time for us.

Michael: I love it. Your mind is always working, Neal, always working. What can we do better? I love that, and I love your appreciation for numbers.

How can people find you, Neal?

Neal: Well, I think that there’s two ways to find me. One is, for folks that are looking for, I want to know everything about multifamily, but I want to do it very quickly and I don’t want to pay huge amounts of money or don’t have huge amounts of money, MultifamilyU.com. That’s the word Multifamily followed by the word U dot com. All of my thoughts, my presentations, my thinking about the banking system, my thinking about what the Federal Reserve is doing, my thoughts on trends for 2017 or 2018 and you can benchmark me actually by going back to my previous year’s presentation and see if those states and cities that I talked about did well or not, so I encourage you to do that, MultifamilyU.com.

If you want to go and look at my portfolio or what it is that we are up to as a company, it’s FINATT.com. That’s F as in Frank, I as in India, N as in Nancy, A as in apple, T as in Tom, T as in Tom, dot come. That’s FINATT.com and that’s our website and you’ll get to see our portfolio and some of the returns that we have on our projects.

Those are two great ways to find me. My email addresses are actually on both of those sites. I happen to be the investor relations guy for my company, so I spend two hours to three hours a day in Starbucks. I have roughly 10 investor calls every week. So, that’s part of my job, so I love talking with people and I enjoy that one-to-one communication. Call me, email me, look me up on the web.

Michael: Fantastic, Neal. I appreciate you coming on the show and sharing your experience with us. Thank you so much.

Neal: Thanks so much, Michael. This has been awesome. Thank you.

Michael: All right. I hope you enjoyed that interview with Neal. I think he kind of glosses over how he got started, but there’s really three things that stood out to me about getting started, is positioning yourself as a leader. That doesn’t mean that you have to have years and years of track record. It just means that you start a Meetup, you share your experiences. Maybe you’re talking to other people and you’re sharing those conversations. You’re simply sharing what you’ve already learned and you’re now simply a step ahead of everybody else who wants to do what you’re doing. With time all of a sudden, you become an expert in the space and eventually do your first deal, so I love that about positioning himself as an expert, even though he doesn’t have any track record. I love that.

Then the second thing is about raising money, is he didn’t say raising money. He says, “I wanted to tell my story.” Really what I want to get you in a mindset of, is when you’re raising money, is not so much, “Oh, I need to raise money,” it’s, “Let me tell my story. Let me share my enthusiasm. Let me tell a story of a particular deal I’m looking,” it’s all about the story. You get people involved in the story and they will tell you whether they’re interested or not. I really liked that.

The third one is partner. It comes up in these podcasts over and over again, different ways, different people, partner. Really think about that. How can I partner with someone to get to my goal faster?

He shared with us some mistakes to avoid and there’s plenty more where that came from, I’m sure. The point is this, you’re always going to make mistakes, but it always turns out okay in the end with multifamily. I don’t know what it is, that’s just the case.

And he talked about is now the right time to get into multifamily? The answer is a resounding yes and he shared with us his two favorite markets, Sacramento and the Orlando market as well. And his love for demographics, which are really, really important.

Hopefully, you found that very useful as you try to make your decisions about multifamily, when to get started, how to get started. One of the great first steps for you, especially about raising money, is to download my free ebook. It’s at TheMichaelBlank.com/ebook. Just download that free ebook there to kind of get you going with raising money.

Again, if you want to experience what it’s like to do your first deal, come to the Financial Freedom Summit April 27-29th in Northern Virginia. Go to TheMichaelBlank.com/Summit for more information and also to sign up. This is not a beginner course, guys. Okay? This is an advanced workshop, so you’re going to need my online course, which is the Ultimate Guide, which comes with it.

All right, so hopefully we’ll see you there and if you loved the show, leave a review on iTunes, love seeing those as well. Listen, I appreciate you guys taking the time with me here today and I will catch you on the next episode.

Announcer: Thanks for listening to The Apartment Building Investing Podcast with Michael Blank. For more free podcasts, articles and videos, go to TheMichaelBlank.com. There you can also download the free ebook, The Secret to Raising Money to Buy Your First Apartment Building. Till next time.

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